Which economic systems are most efficient in allocating scarce resources?
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Economics comes from a Greek word "oikonomia" which translates as household management. The term economics is defined as a process of allocating limited resources to meet unlimited needs of people.
In other words, the main function of economics is to set rules and regulations of scarce resource allocation--deciding who will get how much of resources for what needs. There are three main economic systems with their own resource allocation formulas.
Free market economies
In the free market economy, consumer demand and producer supply determine resource allocation. There is a direct interaction between producers and consumers, each of whom are pursuing their own self-interest. In a free market economy, resource allocation is very competitive which means some producers cannot acquire necessary materials and some consumers suffer from products shortage. In other words, free market cannot ensure balanced and equal resource distribution between all market participants. This is why, otherwise very effective economic system, is often criticised. The United Kingdom has a free market economy.
In command economies, resources are allocated according to a plan designed by the central government. Objective factors, such as demand and supply forces, do not play as important role as the government’s will and perception of the national interest do. The Soviet Union was the brightest example of the rise and fall of a command economy. Historians till today believe that ineffective resource allocation was one of the main reasons of the Soviet Union’s collapse. Today, the biggest command economy is China.
As the term suggests, mixed economy is a combination of elements of command and free market economies. In mixed economies, there is always a private realm--sectors where demand and supply determine resource allocation (like in free market economies), and a public realm--sectors where the government decides who will get what (like in command economies). Mixed economy is arguably the most effective economic system. Even free market economies used elements of state control to regulate the banking sector during the 2008 global economic and financial crisis. Sweden is an example of a modern mixed economy.
A historic form of resource allocation now barely present anywhere in the world, excluding some small tribes in Africa. According to this system, younger generation followed whatever prescriptions concerning resource allocation where left over by the older generation. These prescriptions were heavily influenced by traditions and beliefs of the tribe.
The UK economy
The major part of the UK economy is privatised but many important decisions are made with strong governmental interference. Governmental control is exercised through imposition of mandatory standards, such as price setting. All producers have to comply with price ranges set by the government when determining price of their own products. Competition is also subject to the rules set by the Competition Commission.